Business Finance Final

Which of the following would NOT be considered a use of cash?

C,Depreciation

Suppose you purchase a call option on XYZ stock when the stock price is $81. The option premium is $3, and the strike price is $85. What is your net profit on the call option if the stock price is $89 at maturity?

C. $1

Your grandmother invested a lump sum 26 years ago at 4.25-percent interest. Today, she gave you the proceeds of that investment which totaled $51,480.79. How much did she originally invest?

C. $17,444.86

You plan to buy a new Mercedes four years from now. Today, a comparable car costs $82,500. You expect the price of the car to increase by an average of 4.8 percent per year over the next four years. How much will your dream car cost by the time you are ready to buy it?

C. $99,517.41

What is the benefit-cost ratio for an investment with the following cash flows at a 14.5-percent required return? Year Cash Flow 0 $(46,500) 1 $ 12,200 2 $ 38,400 3 $ 11,300

C. 1.02

Please refer to the information for FM Foods above. Estimate FM's weighted-average cost of capital.

C. 11.27%

Please refer to the financial data for Link, Inc. above. Assume a 365-day year for your calculations. Link's collection period in days, based on sales, at the end of 2017 is

D. 28.8.

Please refer to the financial information for Squamish Equipment above. Calculate Squamish's times-interest-earned ratio for next year assuming the firm raises $40 million of new debt at an interest rate of 7 percent.

D. 4.35

Which of the following figures of merit does not directly take into consideration the time value of money? I. Payback period II. Internal rate of return III. Net present value (NPV) IV. Accounting rate of return

E. I & IV only

The term "financial distress costs" includes which of the following? I. Direct bankruptcy costs II. Indirect bankruptcy costs III. Direct costs related to being financially distressed but not bankrupt IV. Indirect costs related to being financially distressed but not bankrupt

E. I, II, III, and IV

An increase in case and cash equivalents should appear as a source of cash on the sources and uses statement

False

One advantage of ROE is that it is a risk-adjusted measure of performance.

False

Principal is exchanged in interest rate swaps but not in currency swaps.

False

At the end of 2016, Crane Industries, Inc.'s stock price was $30.75. A year later, it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What rate of return did the common stockholders earn in fiscal year 2017?

D. 15.22%

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end. The exchange rate was $1 = ¥100 at the beginning of the year and $1 = ¥97 at year-end. What holding period return, measured in U.S. dollars, did you earn on the bond?

D. 16.49%

The best financing choice is the one that

C. maximizes expected cash flows.

A firm's WACC is the appropriate discount rate to value a project undertaken by the firm only if the project has the same risk as the firm's existing assets.

TRUE

An average-risk project that has an NPV of zero when its cash flows are discounted at the weighted-average cost of capital will provide sufficient returns to satisfy both stockholders and bondholders.

TRUE

Suppose and acquiring firm pays $100 million for a target firm, and the target's assets have book value of $70 million and an estimated replacement value of $80 million. What amount would be allocated to the acquiring firm's goodwill account?

B, $20 Million

Debt financing results in lower after-tax earnings relative to equity financing.

TRUE

If the maturity of a company's liabilities is less than that of its assets, the company incurs a refinancing risk.

TRUE

If the return on invested capital is greater than the after-tax interest rate, then a higher debt-to-equity ratio increases return on equity.

TRUE

In some instances, additional debt financing can encourage managers to act more in the interests of owners.

TRUE

Inflation is one reason why a dollar today is worth more than a dollar in the future.

TRUE

The accounting rate of return is deficient as a figure of merit because it is insensitive to the timing of cash flows.

TRUE

When considering the impact of distress costs on capital structure, which of the following facts should lead ABC Corporation to set a higher target debt ratio than XYZ Corporation (all else equal)?

A. ABC's cash flows from operations are less volatile than XYZ's.

Which of the following statements concerning risk are correct? I. Systematic risk is measured by beta. II. The risk premium increases as unsystematic risk increases. III. Systematic risk is the only part of total risk that should affect asset prices and returns. IV. Diversifiable risks are market risks you cannot avoid.

A. I and III only

Which of the following should be included in the cash flow projections for a new product? I. Money already spent for research and development of the new product II. Capital expenditures for equipment to produce the new product III. Increase in working capital needed to finance sales of the new product IV. Interest expense on the loan used to finance the new product launch

A. II and III only

Suppose you purchase a put option on XYZ stock when the stock price is $40. The option premium is $2, and the strike price is $39. What is your net profit on the put option if the stock price is $41 at maturity?

A. −$2

Please refer to the financial data for Link, Inc. above. Link's profit margin for 2017 is

A. −94%.

Which of the following factors favor the issuance of equity in the financing decision? I. Market signaling II. Distress costs III. Management incentives IV. Financial flexibility

C. II and IV only

When making a capital budgeting decision, which of the following is/are NOT relevant? I. The size of a cash flow II. The risk of a cash flow III. The accounting earnings from a cash flow IV. The timing of a cash flow

C. III only

Ian is going to receive $20,000 six years from now. Sunny is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Ian and Sunny apply a 7-percent discount rate to these amounts?

C. In today's dollars, Ian's money is worth more than Sunny's.

Which of the following is NOT an implication of the pecking order theory of capital structure?

C. More-profitable firms (all else equal) should have higher debt ratios.

When reporting financial performance for tax purposes, U.S. companies prefer to use accelerated depreciation methods over the straight-line method

True

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's price per share?

c, $10

Which one of the following is a source of cash?

decrease in accounts receivable

Which one of the following statements is correct?

C. The assets-to-equity ratio can be computed as 1 plus the debt-to-equity ratio.

Which one of the following statements is false?

C. The design of financial instruments is greatly constrained by law and regulation.

Which of the following securities has a purely residual claim against a firm's cash flows?

C. common stock

At the end of 2017, Stacky Corp. had $500,000 in liabilities and a debt-to-assets ratio of 0.5. For 2017, Stacky had an asset turnover of 3.0. What were annual sales for Stacky in 2017?

D. $3,000,000

Which of the following is a source of cash?

E, Increase in accounts payable

If a firm increases its accounts payable period, other things equal, it increases the cash conversion cycle.

False

An inventory turnover ratio of 10 means that, on average, items are held in inventory for 10 days

False

Private equity firms comprise a relatively insignificant portion of the American economy.

False

The accrual principle requires that revenue not be recognized until payment from a sale is received.

False

The cost of equity is usually reported on the income statement right below interest expense

False

The only reason why the price would fall on a corporate bond is if market interest rates increase.

False

Valuing a call option requires an accurate estimate of the future value of the underlying asset.

False

You can construct a sources and uses statement for 2017 if you have a company's year-end balance sheets for 2017 and 2018

False

Which of the following is NOT a major category on the cash flow statement?

A, Cash flows from selling activities

Which of the following securities has a purely fixed claim against a firm's cash flows?

A. bonds

The book value of a firm is

B, Based on historical cost

What type of financial instrument is depicted in the position diagram shown below?

C. Call option

Inflation benefits borrowers only if the inflation is unexpected.

TRUE

In a strong-form efficient market, insider trading is not profitable.

True

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. What is JM Case's book value per share?

A, $3.50

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market, what will be the book value of equity if all else remains the same?

A, $750,000

Which of the following is NOT a typical reason form differences between profits and cash flow?

A, Goodwill

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

A, Income statement

Which of the following formulas describes the calculation of cash flow from operating activities?

A, Net income + Noncash items+/- Changes in current assets and liabilities

Depreciation expense

A, Reduces both taxes and net income

ZZZ Corporation's income statement shows a provision for income taxes of $65 million in 2017. At the end of 2016, ZZZ's balance sheet reported income taxes payable of $12 million and deferred taxes of $18 million. At the end of 2017 their balance sheet shows income taxes payable of $15 million and deferred taxes of $17 million. What were ZZZ's taxes paid in 2017? A. $61 million B. $63 million C. $65 million D. $67 million E. $69 million

B, $63 million

A company sells used equipment with a book value of $100,000 for $250,000 cash. How would this transaction affect the company's balance sheet?

B, Cash rises $250,000; net plant and equipment falls $100,000; equity rises $150,000

Which one of the following statements does NOT describe a problem with using ROE as a performance measure?

B. ROE is a forward-looking, one-period measure, while business decisions span the past and present.

Which of the following factors, when increased, will tend to cause the value of a put to decrease (all else equal)?

B. The price of the underlying stock

Which of the following is NOT a reason why a dollar today is worth more than a dollar in the future?

B. The value of a dollar in the future will be compounded more than the value of a dollar today.

The capital structure weights used in computing the weighted-average cost of capital

B. are based on the market value of the firm's debt and equity securities.

Individuals who continually monitor the financial markets seeking mispriced securities

B. make the markets increasingly more efficient.

Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The $1,000 principal payment is called the

B. par value.

The weighted-average cost of capital for a firm is the

B. rate of return a firm must earn on its existing assets to maintain the current value of its stock.

The excess return earned by a risky asset, for example, with a beta of 1.4, over that earned by a risk-free asset is referred to as a

B. risk premium.

A balance sheet reports the value of a firm's assets, liabilities, and equity

C, At any point in time

Which one of the following is the financial statement that shows a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets?

C, Balance sheet

Which of the following is the financial statement that summarizes changes in the company's cash balance over a period of time?

C, Cash flow statement

Giant Corp. is considering a project that requires a $1,500 initial cost for a new machine that will be depreciated straight line to a salvage value of 0 on a 5-year schedule. The project will require a one-time increase in the level of net working capital of $300. The project will generate an additional $1,600 in revenues and $700 in operating expenses each year. The project will end at the end of year 2, at which time the machinery is expected to be sold for $800. Giant's tax rate is 50%. In a discounted cash flow analysis of this project, what would be the projected Year 0 free cash flow?

C. −$1,800

What is the holding period return for the year on a bond with a par value of $1,000 and a coupon rate of 8.5% if its price at the beginning of the year was $1,215 and its price at the end of the year was $1,020? Assume interest is paid annually.

C. −9.05%

Ptarmigan Travelers had sales of $420,000 in 2016 and $480,000 in 2017. The firm's current asset accounts remained constant. Given this information, which one of the following statements must be true?

E. The collection period decreased.

In the steps a company takes to prepare for an IPO, the "road show" precedes the "bake-off".

False

JM Case Inc. has a market value of $5 million with 500,000 shares outstanding. The book value of its equity is $1,750,000. If the company repurchases 20 percent of its shares in the stock market, there are no taxes or transaction costs, and all else remains the same, what should the market value of the firm be after the purchase?

D, $4,000,000

Please refer to the financial information for Foodtek, Inc. above. During 2017, how much cash (in millions of dollars) did Foodtek collect from sales?

D, 324

Please refer to the financial information for Foodtek, Inco. above. Assuming that there were no financing cash flows during 2017 and basing your answers solely on the information provided, what were Foodtek's cash flows from operations (in millions of dollars) for 2017?

D, 80

The sources and uses of cash over a stated period of time are reflected in the

D, Cash flow statement

A company purchases a new $10 million building financed half with cash and half with a bank loan. How would this transaction affect the company's balance sheet?

D, Net plant and equipment rises $10 million; cash falls $5 million, bank debt rises $5 million

Please refer to the information for FM Foods above. Estimate FM's after-tax cost of equity capital.

D. 12.20%

According to the pecking order theory of capital structure, why do firms avoid issuing equity?

D. Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall

Which one of the following accurately orders the rate of return on financial securities from highest to lowest over most of recorded market history (the 1928-2016 period)?

D. Common stocks, long-term corporate bonds, long-term government bonds, short-term government bills

Which one of the following statements is true?

D. Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds.

Which of the following are examples of diversifiable risk? I. An earthquake damages Oakland, California. II. The federal government imposes an additional $1,000 fee on all business entities. III. Employment taxes increase nationally. IV. Toymakers are required to improve their safety standards.

D. I and IV only

The price of a call option tends to be lower when which of the following is higher (all else equal)?

D. The strike price

Which one of the following ratios identifies the amount of sales a firm generates for every $1 in assets?

D. asset turnover

Primavera Holdings has a profit margin of 25%, an asset turnover of 0.5, and financial leverage (assets to equity) of 1.5. Primavera has $20 billion in assets, of which half, is in cash and marketable securities. Assume that Primavera earns a 3 percent after-tax return on cash and securities. What would Primavera's return on equity be if it paid out 90% of its cash and marketable securities as a dividend to shareholders?

D. between 40% and 60%

A times-interest-earned ratio of 3.5 indicates that the firm

D. has EBIT equal to 3.5 times its interest expense.

A firm is considering an average-risk project with an IRR of 6%. The firm's cost of debt (KD) is 5%, its cost of equity (KE) is 12%, and its tax rate (t) is 20%. The target debt ratio (D/(D+E)) for the project, in market values, is 0.5. The firm should

D. reject the project regardless of the financing method.

Total risk is measured by _____, and systematic risk is measured by ____.

D. standard deviation; beta

Assume you are a banker who has loaned money to a firm, but that firm is now facing increased competition and reduced cash flows. Which one of the following ratios would you most closely monitor to evaluate the firm's ability to repay its loan?

D. times-burden-covered ratio

On a common-size balance sheet, all accounts are expressed as a percentage of

D. total assets.

In general, the capital structures used by non-financial U.S. firms

D. vary significantly across industries.

Please refer to the financial information for Foodtek, Inc. above. Assuming the company neither sold nor salvaged any assets during the year, what were Foodtek's capital expenditures (in millions of dollars) during 2017?

E, 170

Please refer to the financial information for Foodtek, Inc. above. During 2017, what was the cost of merchandise (in millions of dollars) produced by Foodtek?

E, 218

A $1,000 par value bond with a fixed 10% rate of interest pays coupons semiannually. What amount will the bondholder receive on the bond's maturity date?

E. $1,050

Sol's Sporting Goods is expanding and, as a result, expects additional operating cash flows of $26,000 a year for 4 years. This expansion requires $39,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires an additional $3,000 of net working capital throughout the life of the project; Sol expects to recover this amount at the end of the project. What is the net present value of this expansion project at a 16-percent required rate of return?

E. $32,409.57

You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn a 6-percent annual rate on your money, compounded monthly. Which option should you take and why?

E. You should accept the $200,000 lump sum because the monthly payments are only worth $195,413 to you today.

When investment returns are less than perfectly positively correlated, the resulting diversification effect means that

E. spreading an investment across many diverse assets will eliminate some of the total risk.

The discount rate assigned to an individual project should be based on

E. the risks associated with the use of the funds required by the project.

Which one of the following statements is true?

F. None of the options are correct.

A beta greater than 1 is indicative of an above-average level of diversifiable (unsystematic) risk.

FALSE

A company incurs costs of financial distress only after declaring bankruptcy.

FALSE

A cash flow statement places each source or use of cash into one of three broad categories: operating activities, investing activities, or financing activities

True

A reduction in long-term debt is a use of cash.

True

Across companies, ROA and financial leverage tend to be inversely related.

True

After issue, the market price of a fixed-rate bond can differ substantially from its par value.

True

All else equal, a firm would prefer to have a higher gross margin.

True

Bond investors should be more concerned with real returns than with nominal returns.

True

Current liabilities are defined as liabilities with a maturity of less than on year

True

Investment-grade bonds are usually defined as bonds with ratings of BBB- or higher.

True

Return on assets can be calculated as profit margin times asset turnover.

True

Shelf registration is possible for both debt and equity issues.

True

The times-interest-earned ratio always equals or exceeds the times-burden-covered ratio.

True

Please refer to the information for FM Foods above. Estimate the appropriate weight of debt to be used when calculating FM's weighted-average cost of capital.

A. 11.5%

Honest Abe's is a chain of furniture retail stores. Integral Designs is a furniture maker and a supplier to Honest Abe's. Honest Abe's has a beta of 1.38 as compared to Integral Designs' beta of 1.12. Both firms carry no debt, i.e., are 100% equity financed. The risk-free rate of return is 3.5 percent and the market risk premium is 8 percent. What discount rate should Honest Abe's use if it considers a project that involves the manufacturing of furniture?

A. 12.46%

Company X has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $3.00 per share. It also has $2 million in face value of debt that trades at 90% of par. What is the appropriate debt ratio (D/(D+E)) to use for calculating Company X's weighted-average cost of capital?

A. 23.1%

Please refer to the financial data for Link, Inc. above. Assume a 365-day year for your calculations. Link's inventory turnover, based on cost of goods sold, at the end of 2017 is

A. 5.2.

Which of the following would NOT be considered a cost of financial distress?

A. Lack of interest tax shields

Which one of the following is an example of systematic risk?

A. The Federal Reserve unexpectedly announces an increase in target interest rates.

Which of the following variables does NOT affect the value of a stock option?

A. The predicted future price of the underlying stock

The pre-tax cost of debt

A. is based on the current yield to maturity of the firm's outstanding bonds.

Which one of the following is a source of cash?

B, Increase in inventory

The most popular yardstick of financial performance among investors and senior managers is the

B, Return on equity

Ellsbury Corporation has a goal to reduce its cash conversion cycle. Which of the following actions, holding all else equal, is likely to accomplish this goal?

B. Ellsbury increases the efficiency of its production process, reducing by 10% the average time it takes to convert raw materials to finished products.

Which of the following is NOT an important step in the financial evaluation of an investment opportunity?

B. Estimate the accounting rate of return for the investment.

Which of the following factors favor the issuance of debt in the financing decision? I. Market signaling II. Distress costs III. Management incentives IV. Financial flexibility

B. I and III only

Which of the following factors favor the issuance of debt in the financing decision? I. Market signaling II. Distress costs III. Tax benefits IV. Financial flexibility

B. I and III only

Which of the following statements related to the internal rate of return (IRR) are correct? I. The IRR is the discount rate at which an investment's NPV equals zero. II. An investment should be undertaken if the discount rate exceeds the IRR. III. The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV. The IRR is the best tool available for deciding between mutually exclusive investments.

B. I and III only

Pro forma free cash flows for a proposed project should I. exclude the cost of employing existing assets that could be sold anyway. II. exclude interest expense. III. include the depreciation tax shield related to the project. IV. exclude any required increase in operating current assets.

B. II and III only

Which of the following statements regarding junk bonds is true?

B. Junk bonds have higher priority in bankruptcy than preferred stock.

The basic lesson of the M&M theory is that the value of a firm is dependent upon

B. the total cash flow of the firm.

Celebrity Auto Parts, Inc. Facts and assumptions as of Dec. 31, 2017 EBIT for 2017 (millions) $ 420 Company equity beta 1.20 Stock price $ 30 Number of shares outstanding (millions) 200 Book value of equity (millions) $ 3,500 Book value of interest-bearing debt (millions) $ 1,500 WACC 9% Tax rate 25% Please refer to the information for Celebrity Auto Parts above. What was Celebrity's EVA in 2017?

B. −$135 million

Which of the following is/are helpful for evaluating the effect of leverage on a company's risk and potential returns? I. Estimated pro forma coverage ratios II. The recognition that financing decisions do not affect firm or shareholder value III. A range of earnings chart and proximity of expected EBIT to the breakeven value IV. A conservative debt policy that obviates the need to evaluate risk

C. I and III only

Which of the following statements are true? I. Underwriters help private companies access public stock markets through IPOs. II. Shelf registrations and private placements are examples of seasoned security issues. III. Issue costs for debt are typically greater than issue costs for equity. IV. Bearer bonds make it easier for investors to avoid paying taxes on interest income.

C. I, II, and IV only

Breakers Bay Inc. has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. All else held constant, how will this accomplishment be reflected in the firm's financial ratios?

C. increase in the inventory turnover rate

Homemade leverage is

C. the borrowing or lending of money by individual shareholders as a means of adjusting their level of financial leverage.

Carbon8 Corporation wants to raise $120 million in a seasoned equity offering, net of all fees. Carbon8 stock currently sells for $28.00 per share. The underwriters will require a fee of $1.25 per share, and indicate that the issue must be underpriced by 7.5%. In addition to the underwriter's fee, the firm will incur $785,000 in legal, administrative, and other costs. How many shares must Carbon8 sell in order to raise the desired amount of capital?

D. 4.9 million

Please refer to the information for FM Foods above. Estimate the appropriate weight of equity to be used when calculating FM's weighted-average cost of capital.

D. 88.5%

In March, with the spot price of wheat at $5.75 per bushel, Hollywood Bakery longs 100 July wheat futures contracts (5,000 bushels each) on the CBOE at a futures price of $5.90 per bushel. In June, Hollywood Bakery closes out its futures contracts when the futures price is $5.80 per bushel. What is Hollywood Bakery's gain (or loss) on the futures contracts?

D. A loss of $50,000

Which of the following statements are correct? I. Using the same risk-adjusted discount rate to discount all future cash flows adjusts for the fact that the more distant cash flows are often more risky than cash flows occurring sooner. II. If you can borrow all of the money you need for a project at 5%, the cost of capital for this project is 5%. III. The best way to obtain the cost of debt capital for a firm is to use the coupon rates on its bonds. IV. A firm's weighted-average cost of capital is NOT the correct discount rate to use for all projects undertaken by the firm.

D. I and IV only

Which of the following statements regarding interest tax shields is correct?

D. Taxable income is reduced by the amount of the interest on a firm's debt.

Your brother will borrow $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at an 8.6-percent annual interest rate, compounded monthly. What is the amount of each payment?

E. $366.05

Please refer to the financial information for Squamish Equipment above. For next year, calculate Squamish's times-burden-covered ratio if Squamish sells 2 million new shares at $20 a share.

E. 2.10

A divisional manager submitted a project proposal to the chief financial officer, complete with a calculated NPV for the project. The chief financial officer studied the proposal and pointed out that the divisional manager had failed to account for a one-time increase in net working capital of $60,000 that will be required over the life of the seven-year project. Assuming the full value of net working capital will be recovered at the end of the project, how will the project's NPV change after making the chief financial officer's adjustment? Assume a discount rate of 9%.

E. None of the options are correct.

Please refer to the financial data for Link, Inc. above. Link's gross margin for 2017 is

E. None of the options are correct.

Please refer to the income statement for VGA Associates below. If VGA had a principal repayment of $8,000 due in 2017, what was its times-burden-covered ratio in 2017?

E. None of the options are correct.

Which of the following would allow a corporation to issue a bond at a lower coupon rate, all else equal?

E. None of the options are correct.

All else equal, if two competing firms in industry X are valuing the same plant in industry Y for a potential acquisition, the firm with the more volatile stock should arrive at a lower valuation for the plant.

FALSE

The evidence indicates that, on average, a company's stock price declines when it announces a new issue of equity.

TRUE

The payback period measures the amount of time the company must wait to recoup its initial investment.

TRUE

The present value of a perpetuity can be calculated as the annual cash flow divided by the discount rate.

TRUE

When a company is in financial distress, its shareholders may have an incentive to undertake excessively risky investments.

TRUE

When evaluating investments under capital rationing that are independent and can be acquired fractionally, ranking by the BCR is the appropriate technique.

TRUE

When projected cash flows are in nominal dollars, they should be discounted with a nominal discount rate.

TRUE

What is the difference in the value of a $5,000 annual perpetuity and an annuity of $5,000 for 100 years? Assume that the discount rate is 8% and that cash flows are received at the end of the year.

A. $28

What would be the carried interest (at 20%) on a private equity portfolio with an initial value of $500 million that was subsequently liquidated for $750 million?

A. $50 million

Salinas Corporation has net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas Corp. currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas Corp. if it goes through with the debt issuance?

A. $560,000

Given the spreadsheet below, what value would Excel return if you entered the following formula? = NPV(B2,B5:D5)

A. $577.57

EAC Nutrition offers a 9.5-percent coupon bond with annual payments maturing 11 years from today. Your required return is 11.2 percent. What price are you willing to pay for this bond if the face (or par) value is $1,000?

A. $895.43

At the end of 2016, Crane Industries, Inc.'s stock price was $30.75. A year later, it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the dividend yield in fiscal year 2017?

A. 1.79%

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.

A. asset turnover and control

Unsystematic risk

A. can be effectively eliminated by portfolio diversification.

Mike just purchased a bond which pays $40 every six months in interest. The $40 interest payment is also called the

A. coupon.

Principal amounts are usually exchanged

A. in currency swaps.

Under the simplifying assumptions of Modigliani and Miller, an increase in a firm's financial leverage will

A. increase the variability in earnings per share.

Which of the following statements concerning a firm's cash flows and profits is false?

B, a company that sells merchandise at a profit will generate cash soon enough to replenish cash flows required for continued production

A project will produce after-tax operating cash inflows of $3,200 a year for 5 years. The after-tax salvage value of the project is expected to be $2,500 in year 5. The project's initial cost is $9,500. What is the net present value of this project if the required rate of return is 16 percent?

B. $2,168.02

You are to receive an annuity of $1,000 per year for 10 years. You will receive the first payment two years from today. At a discount rate of 10%, what is the present value of this annuity?

B. $5,585.97

In a discounted cash flow analysis of Giant Corp.'s project described in the problem above, what would be the projected Year 1 free cash flow?

B. $600

Please refer to the income statement for VGA Associates below. Assuming that cost of goods sold are variable and operating expenses are fixed, what was VGA Associates' breakeven sales volume in 2017?

B. $80,000

Please refer to the financial data for Link, Inc. above. Assume a 365-day year for your calculations. Link's payables period in days, based on cost of goods sold, at the end of 2017 is

B. 24.3.

Please refer to the information for FM Foods above. Estimate FM's after-tax cost of debt capital.

B. 4.10%

Which of the following is NOT likely to be a prudent financing policy for a rapidly growing business?

B. Borrow funds rather than limit growth, thereby limiting growth only as a last resort.

The after-tax cost of debt generally increases when I. a firm's bond rating improves. II. the market-required rate of interest for the company's bonds increases. III. tax rates decrease. IV. bond prices rise.

B. II and III only

Which of the following ratios are measures of a firm's liquidity? I. fixed asset turnover ratio II. current ratio III. debt-equity ratio IV. acid test

B. II and IV only

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end. The exchange rate was $1 = ¥100 at the beginning of the year and $1 = ¥122 at year-end. What holding period return, measured in U.S. dollars, did you earn on the bond?

B. −7.38%

Florida Corp. is calculating the appropriate rate for discounting cash flows on a project valued using the APV method. Florida's target debt ratio (D/(D+E)) in market value terms is 50%, and the yield-to-maturity on its outstanding debt is 6%. A comparable firm has an equity beta of 1.4 and a debt ratio (D/(D+E)) of 40%. Assume a risk-free rate of 5% and a market risk premium of 8%. Florida's tax rate is 40%. What discount rate should Florida use?

C. 11.72%

JKL Corporation, a company devoted primarily to paper products, is estimating the cost of equity appropriate for a vegetable processing plant it is planning to build. JKL Corp. has an equity beta of 1.0 and a debt ratio (D/(D+E)) of 0.3. A comparable (vegetable processing) firm has an equity beta of 0.8 and a debt ratio of 0.2. Assume a risk-free rate of 5% and a market risk premium of 8%. What cost of equity should JKL use in this situation?

C. 12.3%

At the end of 2016, Crane Industries, Inc.'s stock price was $30.75. A year later, it was $34.88. Per share dividends over the year were $0.55, while earnings per share were $1.33. What was the percentage change in the share price in fiscal year 2017?

C. 13.43%

Please refer to the financial information for Squamish Equipment above. For next year, calculate Squamish's earnings per share if Squamish sells 2 million new shares at $20 a share.

C. 2.00

Please refer to the financial information for Squamish Equipment above. Calculate Squamish's earnings per share next year assuming Squamish raises $40 million of new debt at an interest rate of 7 percent.

C. 2.12

Please refer to the financial data for Link, Inc. above. The current ratio for Link at the end of 2017 is

C. 2.76.

TTT Corporation reported earnings per share of $2.52 in 2012 and $3.15 in 2017. At what compound annual rate did earnings per share grow over this period?

C. 4.56%

You plan to pay $50 for a share of preferred stock that pays a $2.40 dividend per year forever. What annual rate of return will you realize?

C. 4.80%

What is the length of the cash conversion cycle for a firm with $3 million in inventory, $1.5 million in accounts payable, a collection period of 40 days, and an annual cost of goods sold of $18 million?

C. 70.4 days

JKL Corporation has a projected times-interest-earned ratio of 4.0 for next year. What percentage could EBIT decline next year before JKL's times-interest-earned ratio would fall below 1.0?

C. 75%

Which of these ratios, or levers of performance, are the determinants of ROE? I. profit margin II. financial leverage III. times interest earned IV. asset turnover

C. I, II, and IV only

The interest tax shield has no value when a firm has: I. no taxable income. II. debt-equity ratio of 1. III. zero debt. V. no leverage.

C. I, III, and IV only

Please refer to the financial data for Link, Inc. above. Assume a 365-day year for your calculations. Link's days' sales in cash at the end of 2017 is:

D. 249.7

The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations? I. Firms that have a 100-percent retention ratio II. Firms that pay an unchanging dividend III. Firms that pay a constantly increasing dividend IV. Firms that pay an erratically growing dividend

C. II and III only

The cost of equity for a firm

C. can be estimated from the capital asset pricing model or the dividend growth model.

Which of the following statements concerning the cash flow production cycle is true?

D, The movement of cash to inventory, to accounts receivable, and back to cash is known as the firm's working capital cycle

Which of the following is a reason why a company's market value of equity differs from its book value of equity?

D, Values of assets on the balance sheet typically reflect historical cost, adjusted for appropriate depreciation

In a discounted cash flow analysis of Giant Corp.'s project described in the problem above, what would be the projected Year 2 free cash flow?

D. $1,750

Naomi plans on saving $3,000 a year and expects to earn an annual rate of 10.25 percent. How much will she have in her account at the end of 45 years?

D. $2,333,572

Please refer to the financial information for Squamish Equipment above. Calculate Squamish's times-burden-covered ratio for the next year assuming the firm raises $40 million of new debt at an interest rate of 7 percent, and that annual sinking fund payments on the new debt will equal $8 million.

D. 1.49

You bought a yen-denominated corporate bond at the beginning of the year for ¥100,000. The bond paid 3 percent annual interest and was trading for ¥110,000 at year-end. What holding period return, measured in yen, did you earn on the bond?

D. 13%

Which of the following figures of merit might not use all possible cash flows in its calculations? I. Payback period II. Internal rate of return III. Net present value (NPV) IV. Benefit-cost ratio

D. I only

Which of the following statements are correct concerning diversifiable, or unsystematic, risks? I. Diversifiable risks can be largely eliminated by investing in 50 unrelated securities. II. There is no reward for accepting diversifiable risks. III. Diversifiable risks are generally associated with an individual firm or industry. IV. Beta measures diversifiable risk.

D. I, II, and III only

According to the pecking order theory proposed by Stewart Myers of MIT, which of the following are correct? I. For financing needs, firms prefer to first tap internal sources, such as retained profits and excess cash. II. There is an inverse relationship between a firm's profit level and its debt level. III. Firms prefer to issue new equity rather than source external debt. IV. A firm's capital structure is dictated by its need for external financing.

D. I, II, and IV only

Financial leverage I. increases expected ROE but does not affect its variability. II. increases breakeven sales, like operating leverage, but increases the rate of earnings per share growth once breakeven is achieved. III. is a fundamental financial variable affecting sustainable growth. IV. increases expected return and risk to owners.

D. II, III, and IV only

Klamath Corporation has asset turnover of 3.5, a profit margin of 5.2%, and a current ratio of 0.5. What is Klamath Corporation's return on equity?

D. Insufficient information to find ROE

In comparison to industry averages, Okra Corp. has a low inventory turnover, a high current ratio, and an average quick ratio. Which of the following would be the most reasonable inference about Okra Corp.?

D. Its inventory level is too high.

Please refer to the financial data for Link, Inc. above. Which of the following statements best describes how the Link's short-term liquidity changed from 2016 to 2017?

D. Link's short-term liquidity has deteriorated considerably, but from a high initial base.

Unitron Corp. is considering project Z, which costs $50 million and offers an annual after-tax cash flow of $7.5 million in perpetuity. The project is in an industry that has greater market risk than Unitron's typical projects. Unitron's company weighted-average cost of capital, based on its typical projects, is 15%. Should Unitron Corp. accept project Z?

D. No, because the NPV of the project is negative.

Which of the following statements regarding preferred stock is true?

D. None of the options are correct.

Which of the following statements related to market efficiency tend to be supported by current evidence? I. Markets tend to respond quickly to new information. II. It is difficult for the typical investor to earn above-average returns without taking above-average risks. III. Short-run prices are difficult to predict accurately based on public information. IV. Markets are most likely strong-form efficient.

E. I, II, and III only

Please refer to the information for FM Foods above. FM is contemplating an average-risk investment costing $100 million and promising an annual after-tax cash flow of $15 million in perpetuity. Which of the following statements is/are correct? I. FM should reject the project because the IRR is greater than the firm's WACC. II. FM should accept the project because the IRR is greater than the firm's WACC. III. FM should accept the project because the NPV is greater than zero. IV. FM should reject the project because the NPV is less than zero.

E. II and III only

Which of the following are the most likely reasons for why a stock price might not react at all on the day that new information related to the stock issuer is released? I. Insiders knew the information prior to the announcement. II. Investors need time to digest the information prior to reacting. III. The information has no bearing on the value of the firm. IV. The information was anticipated.

E. III and IV only

As a noncash expense, depreciation is irrelevant in the determination of a project's cash flows.

FALSE

Asset betas measure financial risk and business risk.

FALSE

Failing to include real options in a project valuation could cause the NPV of the project to be overestimated.

FALSE

If a firm's cost of debt is lower than its cost of equity, shifting the firm's financing toward more debt will always reduce the firm's WACC.

FALSE

In reality, the cost of equity is always less than the cost of debt because firms are not obligated to pay out cash to shareholders.

FALSE

Sunk costs should be included in the cash flows for valuing a project only if they are directly attributable to that specific project.

FALSE

The IRR and NPV always yield the same investment recommendations.

FALSE

The IRR is the discount rate at which an investment's NPV equals its initial cost.

FALSE

The M&M irrelevance proposition assures financial managers that their choice between equity and debt financing will ultimately have no impact on firm value.

FALSE

The adjusted present value (APV) method of valuation is superior to the standard WACC method of valuation because the WACC method makes no adjustment for interest tax shields.

FALSE

The interest tax shield reduces a firm's taxes by the amount of interest on its debt.

FALSE

When conducting a discounted cash flow analysis of a project, it is important to always include a careful estimate of financing costs in the project's cash flows.

FALSE

A company's return on assets will always equal or exceed its profit margin.

False

A decline in the Net fixed assets account between year-end 2016 and year-end 2017 is a clear indication that fixed assets were sold during 2017.

False

Accounting rules require U.S. companies to depreciate research and development (R&D) expenditures using the straight-line method

False

All else equal, an increase in a company's asset turnover will decrease its ROE

False